Americans thirst for credit has led them to a record level of debt. Credit card debt has increased 25% to $963 million over the last 10 years. The average balance for families holding a balance was $7,300 in 2007. Credit card issuers collect $15 billion in fees from consumers, but Congress just made it a little tougher on them with the Credit Card Accountability, Responsibility and Disclosure Act, which the President has said he will sign. The bill gives consumers relief from penalty fees and some interest rate hikes. The credit card companies are threatening to cut reward programs, like points and airline miles, as a way to make up for lost revenue, but that remains to be seen. In summary, the bill means the following to consumers:
1. Banks will have to give 45 days’ notice before raising their rates.
2. No more rate hikes on existing balances.
3. Banks must notify customers in advance before significantly changing terms, like rewards programs.
4. Banks must send out your bill at least 21 days before the due date.
5. Payments received by 5pm on the due date, must be recorded as received on time, not late due to some bogus mid-day deadline. Also, banks will not be allowed to charge late fees for applying your payment on Monday (one day after a Sunday due date) or one day after a holiday due date.
6. Banks will have to get consumers’ permission before allowing their card to be charged in excess of the credit limit. Say your credit limit is $10,000 and your balance is $9,900 when you charge something for $200, thus putting you $100 over your credit limit. The banks currently accept most transactions like this, but charge you a hefty “over limit” fee. Now they will have to ask your permission or reject the charge that would put you over your limit.
7. If you have several sub-balances on one card at different interest rates, banks currently apply the portion of your payment that exceeds the minimum payment to the balance with the lowest interest rate. Now, they will have to apply those over-payments to the balance with the highest interest rate.
8. No one under 21 (i.e. students) can have a card unless a parent, legal guardian, or spouse (over 21) is the primary card holder. Any increase to that young person’s credit will require written permission from the parent, guardian or adult spouse.
9. On a somewhat unrelated issue, gift card issuers will have to inform buyers of fees for not using the card within a certain amount of time. Gift card issuers have been earning hefty fees by charging card recipients who wait a year or more before using the card. Cards will now not be allowed to expire within 5 years of the purchase date. Californians, however, will still enjoy extra protection. Under existing state law, gift cards purchased in California, NEVER EXPIRE.
The banks are arguing that these punitive credit card measures will require them to scale back on reward programs. Many industry experts, however, feel that, in fact, banks will have to increase these reward programs to remain competitive. Most credit cards are essentially the same and it is these rewards that give the cards their personality, or brand identity. Banks earn high fees from merchants when customers use their cards at retail locations so they are unlikely to eliminate their reward programs, thus giving their best customers a good reason to use a competitor’s card.
